ANSYS realigns to go from $1B to $2B

ANSYS held its first earnings call under the leadership of new CEO Ajei Gopal today to discuss Q4 and full-year 2016 results and to offer investors a glimpse into where Mr. Gopal believes he can take ANSYS. One clear takeaway from the call: the goals are ambitious, as he told investors that he’s building a company that can grow from $1 billion to $2 billion in revenue. He gave no timetable, and the goals for 2017 are modest compared to that end-game, but make no mistake: that’s the ultimate objective. He’s going to lay out more of the details in an investor meeting in September but we can already start to see the outlines: more efficient sales people and processes, selling what the customer wants in the way the customer wants to buy it (meaning, stay flexible on licensing), an even broader product line, a combination of organic and acquired growth … But also a pruning of current resources so that ANSYS can reallocate resources to areas that it believes will contribute to higher growth in the future. That means a global, across-all-parts-of-the-company 4% reduction in headcount that’s to be completed by the end of Q2. As CFO Maria Shields told investors, ANSYS plans to focus on “product opportunity areas like additive manufacturing, digital twin, IoT, and even some of our core products.” But she also plans to invest in sales and other corporate infrastructure that will be needed as she and Mr. Gopal “scale the business from $1 billion to $2 billion”. I should also mention that ANSYS announced the resignation of Walid Abu-Hadba, Chief Product Officer, effective May 2017.

it all sounds a bit dire, but Q4 and 2016 actually were pretty good. You can get all of the details at ANSYS, but here are the factoids that struck me:

Q4 GAAP revenue was $270.6 million, up 8% as reported while 2017 GAAP revenue was $988.5 million, up 5% as reported. Put those two together, and one sees that growth picked up in Q4, a trend ANSYS says continues into Q1 2017.

Software license revenue in Q4 was $161.5 million, up 8%. Maintenance and services revenue was $109.2 million, up 7%.

Contribution continues to tilt towards direct (75% on Q4, 76% in F2016) but Mr. Gopal said that channel growth is a focus in Europe, so this may swing back a bit in fiscal 2017 and beyond.

ANSYS reported signing 37 customers with orders of more than $1 million in Q4 (up from 34 a year ago), including seven customers with orders in excess of $10 million each. The company said that eight of these were enterprise agreements (bringing the total to 18 for 2016); these are part of ANSYS’ program to look at accounts more strategically, with a view towards “capturing pent-up demand for long-term enterprise vendor consolidation, particularly in North America.” The company describes these contracts as typically including “products from multiple product lines … and typically include training and other engineering services.” In other words, they’re helping customers consolidate on ANSYS solutions, potentially displacing competitors or in-house solutions, and offering services to make it all work.

For 2017, ANSYS basically reaffirmed earlier guidance, only making minor adjustments for currency fluctuations since November. For Q1, ANSYS sees revenue between $237 million and $246 million (which would be growth of 5% to 9% over last year) and, for 2017, ANSYS sees revenue of $1.010 billion to $1.045 billion, or up around 4%.

So a decent question is, how are you going to get to $2 billion in revenue at a growth rate of 4% per year? You can’t, at least not under one CEO’s watch. We can expect Mr. Gopal to announce acquisitions, and probably some really big ones, as he told analysts: “I’ve had some experience in driving M&A and I’ve seen the transformative opportunity that can be created by doing the right M&A. But I want to be thoughtful and make sure that we do the right M&A. As you know, the wrong deal can have a very negative impact on an organization. So absolutely, M&A is something that we continue to look at.”

What other levers can Mr. Gopal pull, besides adding more products to sell? More sales resources to sell them — more focus on channel in Europe, more direct resources globally. Greater sales productivity. More users, both in enterprise accounts that already use some of the ANSYS portfolio, and in new accounts that ANSYS perhaps can’t reach now via a cloud offering that removes the compute power barrier to entry. ANSYS has cloud offerings (and continues work on a multi-tenant version); more details coming soon according to Mr. Gopal. A slight hitch in this growth path is the transition to leases –lower initial revenue from a lease than a perpetual could see revenue shrink from some customers– but let’s see what Mr. Gopal and his new VP of Sales come up with to get to $2 billion.